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04 January 2005

What Danny wants.....

For every person in Newfoundland and Labrador who claims to stand solidly behind Danny Williams in his efforts to change the Atlantic Accord, there is a different version of what the premier wants. For some it is to get "our" share of the offshore, as if the Atlantic Accord doesn't exist. For others it is fixing a problem with the Accord. For still others it is to get "our" revenues plus a bit more besides to help out.

For Loyola Sullivan, it now seems to mean reparations for every possible slight the province has received or every bad deal we negotiated. Compared to the Upper Churchill deal, the Versailles diktat was a minor annoyance.

Odd then that the Premier told the House of Assembly last fall that there was no need to debate the Accord in the House because "we know what we asked for...".

That's an odd comment, because, as you will see below, there are actually three different versions of what the Premier asked for. Just so that his supporters don't suddenly turn blue with rage, rest assured that the three versions are accurate and based on official documents.

The following information comes from four sources:

- the Progressive Conservative policy manual, the so-called Blue print;
- correspondence with the Government of Canada, released by the provincial government through Freedom of Information requests and news releases;
- media interviews by Premier Williams and others; and,
- provincial government news releases

At the outset, it is important to recall two aspects of the Atlantic Accord in particular.

First, the provincial government gained the right under the Accord to set its own revenues from offshore production as if the resources were on land, that is as if they were "own-source" revenues. This includes royalties. The provincial government receives 100% of the revenues it has set without any reduction; in Fiscal Year 2004, the provincial government will receive at least $300 million in direct revenues from offshore oil production [Williams to Martin, May 26, 2004 attachment "Offshore revenue, existing offsets and proposed offset"; mid-year financial statement by Hon. Loyola Sullivan]

Second, the Atlantic Accord provides that Equalization will apply to these revenues. As such, as provincial own-source revenues grow, the amount of Equalization top-up declines. The Accord does provide an Equalization offset that effectively shielded some revenues from the Equalization calculations. It is clear from the Accord itself that this was intended to be a temporary, declining offset. ["The Atlantic Accord: memorandum of understanding between the Government of Canada and the Government of Newfoundland and Labrador on offshore oil and gas management and revenue sharing", 11 February 1985. www.cnopb.nfnet.com/publicat/reg/aa_mou.pdf.]

This interpretation is confirmed by comments made by John Crosbie in a 1990 interview with the Sunday Express. Commenting on the claim that the Accord reduced the province's Equalization entitlement due to growing provincial government revenues, Mr. Crosbie said:

"That's the whole point to the [Equalization] formula... This is nothing to complain about; this is something to be joyous about. So why would they try to pretend that Newfoundland gains nothing from the royalties? I mean this is absolutely bloody nonsense..." [Philip Lee, "Newfoundland, Ottawa clash over Atlantic Accord royalty provisions", The Sunday Express (St. John's), 23 September 2004,]

With that background, let us now turn attention to Premier Williams' proposals.Danny Williams: Premier in Waiting, October 2003

The Blue Book (www.pcparty.nf.net) contains no reference to changes to the Atlantic Accord.

Rather, it commits a Conservative government to seek changes to the entire Equalization formula so that revenues from non-renewable natural resources are removed from the calculations.

The Blue Print also states that:

"[i]n exchange, we will commit, in a formal federal-provincial agreement if necessary, to spend non-renewable revenues to modernize economic infrastructure in the Province and to bring down the provincial debt, so that future generations of Canadians living in this Province will continue to benefit long after the resources are used up." [Emphasis added]

Danny Williams: January - June 5, 2004

Premier Williams met with Prime Minister Martin in Ottawa on December 18, 2003 and again by telephone on January 6, 2004. The Premier follows up with a letter to the Prime Minister on the same day. He described the province's fiscal position and the government's plans to address the problems. Included in that letter is the following statement:

"Simply put, the ability to invest 100% of our Atlantic Accord oil revenues in economic infrastructure and in paying down our debt would go a long way to helping Newfoundland and Labrador stand on its feet in the long term." [Williams to Martin, Jan 6, 2004]

The Prime Minister replied on January 27, 2004:

"With regard to the Atlantic Accord, as I stated on January 6, 2004, the Government of Canada is open to discussing the issues related to offshore resources. However, it is imperative that these discussions be based on the principle of fair treatment across the country." [Martin to Williams, Jan 27, 2004]

Some details of the provincial position were contained in a slide presentation made to John Efford on February 27, 2004 and titled "Proposal for new Atlantic Accord offset mechanism". This appears to be the only written version of the proposal, except for a similar slide presentation made available to news media and tabled later in the House of Assembly.

The presentation focuses on changes to the Equalization offset provisions contained in the original Atlantic Accord. These were intended as temporary, transitional grants to the provincial government designed to offset losses in Equalization as provincial own-source revenues grew from oil production. The original offset nominally shielded a declining amount of provincial revenue from Equalization calculations.

An assessment of the original offset prepared by Wade Locke in 1991 concluded that the original offset provisions actually shielded only 3% of revenues from Equalization including the offset payments. [Wade Locke, An examination of the equalization protection provided under the Atlantic and Nova Scotia Accords, (St. John’s: Memorial University Institute for Social and Economic Research, 1991) ]

Slide 9 from the February 27 presentation contains the following points:

- Replace the existing offset provisions [Editor's note: due to expire in 2011/2012]
- New offset mechanism- Provide a payment equal to 100% of the net direct provincial offshore revenue
- Net Direct Revenue- Royalties and Corporate Income Tax which is generated in the NL offshore area, less the equalization clawback (currently at 70%)

There is no specific reference to a time period for the new offset, although a bullet point on Slide 10 states that the new mechanism would provide "benefits over a longer period". The original Accord offset mechanism shielded 100% of revenues but only for the first four years. As noted above, the original Accord offset provisions expire in 2011/2012 and shielded less revenue from Equalization than indicated in the slides.

The Chretien administration provided a new Equalization offset option to the provincial government in 1993, one that shielded more revenue than the original Accord and did so for the duration of oil production. This is the so-called generic option which shields 30% of oil revenue from Equalization calculations; in other words if oil revenue is $100 million, then only $70 million is used to determine the provincial government's per capita fiscal capacity.

The Premier's commitment on using revenues for debt reduction and infrastructure is repeated in a letter to the Prime Minister on May 21, 2004. Another letter on May 26, 2004 to the Prime Minister contains Slide 9 of the deck presented on February 27, 2004.

The provincial government's position can be summarized as follows:

1. A new offset mechanism that provides the provincial government an amount equal to 100% of direct revenues in addition to direct revenues.

2. Direct revenues are defined as royalties and corporate income tax. [Note that under the Atlantic Accord, provincial government direct revenues comprise six separate types, including royalties and corporate income tax. There is no explanation for this apparent mistake on the part of the provincial government.]

3. The money would be used for debt reduction and infrastructure development.

4. The time frame is unclear. It can be read as meaning seven years (replacing the existing offset) since the time frames match and the doubling up of revenues replaces the Accord's original offset with a concept that "benefits over a longer period" (12 years total versus four years).

Danny Williams: June 10, 2004 to current

The Premier and Prime Minister spoke by telephone in a now infamous conversation on Saturday June 5, 2004. Fully five days later, the Premier wrote to the Prime Minister ostensibly to confirm the agreement. His letter contains the following statement of the provincial proposal:

"The proposal my government made to you and your Minister of Natural Resources provides for 100% of direct provincial revenues generated by petroleum resources in Newfoundland and Labrador Offshore Area [sic], to accrue to the government of Newfoundland and Labrador and be sheltered from the clawback provisions of the Equalization formula, (currently at 70%). Direct provincial revenues include royalties, provincial corporate income tax, and fees forfeitures and bonuses. Our proposal is for the current time limited and declining offset provisions in the Atlantic Accord to be replaced by a new offset provision continuing over the life of the offshore petroleum production which would provide a payment equal to 100% of the amount of the annual direct provincial revenues which are clawed back by the equalization program."

This may be summarized as follows, with the changes being obvious:

1. The offset is in addition to provincial direct revenues, as previously proposed.

2. Direct revenues are defined more accurately.

3. The commitment to direct the added revenues to specific purposes has been removed.

4. The duration of the offset is clearly stated as being for the life of production.

Several points are worthy of note beyond the obvious changes.

First, no provincial government currently enjoys or has ever received this type of transfer from the Government of Canada.

Second, this proposed "offset" would continue irrespective of whether or not the provincial government qualified for Equalization transfers. In other words, under the revised Williams' proposal the provincial government would receive an amount equal to 200% of its direct revenues (direct revenues + new transfer) even after the provincial government's fiscal capacity met or exceeded the national standard used for judging Equalization entitlement.

Newfoundland and Labrador is forecast to be off Equalization, that is to become a "have" province within the next three to five years, based on economic growth, oil prices and development of Voisey's Bay and Hebron. Under the Williams revised proposal, Newfoundland and Labrador would receive federal transfer payments to which no other province is entitled, unless Nova Scotia attains the same "have" status.

The Premier has implicitly acknowledged this interpretation in several media interviews. He no longer refers to an Equalization offset but to a new type of offset designed to "keep us whole". Premier Williams explained it to Carole MacNeil of CBC Sunday in this way during an interview in October 2003:

Williams:...What the issue is, once we get to equalization, the equalization border - the five province standard - once we get equalized, we are not asking for equalization. That's where the misunderstanding is: we are saying that once our revenues get to a point where we no longer need equalization, we don't want it. We'll be the same as every other province that gets equalization - New Brunswick, Prince Edward Island, Nova Scotia. What we want, though, is the right, after we equalize, to keep 100% of our revenues, our provincial royalty revenues. The cap prevents us from doing that. (...)

MACNEIL: Until you're equalized.

WILLIAMS: No, no and beyond, because why should we get less than 100% of our revenues after we're equalized? [The full transcript of this interview may be found at www.cbc.ca/sunday/williams.html]

It must be noted that the Premier's reference to the cap, the use of the Ontario fiscal capacity from the October 2004 federal offer, is completely erroneous.

Under the Atlantic Accord, the provincial government continues to receive its own revenues, including royalties, in their entirety until oil and gas production ceases. There is no mechanism by which those revenues are reduced, nor has one ever been proposed. All that would occur once the provincial government is "equalized" is that the Equalization transfers would cease. Provincial government own-source revenues, including oil and gas revenues, continue unaffected. The cap was merely a mechanism by which the federal government proposed to calculate the added transfers in addition to Equalization and direct revenues and determine a cut-off point for what was originally an offset to Equalization losses. The Premier's convoluted language in the MacNeil interview appears to represent, among other things, an attempt to reconcile his pre- June 5 position with his current one.

Third, the provincial government proposal on June 10 eliminated its own condition on how the added transfer would be spent.

Conclusion

The provincial government proposal on Atlantic Accord changes have gone through at least three substantive alterations. The provincial government's contention that its position has been consistent flies in the face of direct evidence.

The changes are not inconsequential. The Government of Canada must always be mindful of the impact of special arrangements with individual provinces on its relations with the others. It must also be mindful of the financial implications of such arrangements. Quebec, for example has been seeking special treatment of the parental leave program within Quebec all at federal expense. The federal government under Jean Chretien rejected the concept out of hand.

The revenues being transferred, especially under the revised proposal, are not provincial revenues. They are federal revenues collected within Newfoundland and Labrador to sustain federal government programs and services. Historically, in this province, the federal government has provided almost half of the money the provincial government uses to provide services that are exclusively within the provincial government's constitutional jurisdiction. In the current fiscal year, for example, the provincial government will receive an estimated 75% of all provincial and federal tax-type revenues in the province through its own sources plus Equalization and other transfers. The Williams' revised proposal (post-June 10) would see that situation continue, contrary to the basic principles of the Equalization program to which John Crosbie referred.

Irrespective of the position one takes on proposed changes to the Accord, it is clear that the Williams administration has changed its position at least three times. Perhaps most strikingly, in light of continued references to the province's supposedly unprecedented financial situation, the government's own commitment on how the money would be spent has been dismissed

The crux of the current impasse may well be that the federal government is working to meet the original Williams proposal, something that is attainable in the context of the Constitution and historical federal-provincial fiscal relations. In the meantime, the Premier has committed that he "will not say yes to less" than his revised proposition.